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What has changed? Reparations and Debt

The more I read John Maynard Keynes the more I think he must have been as humane as he was intelligent. His “Essays in Persuasion” start with a number of articles written in 1919 criticising the Treaty of Versailles and specifically the proposed reparations to be paid by Germany to the Allies.

He starts by analysing the state of the German economy and what, with a series of optimistic assumptions, it might be able to afford as an annual reparation payment. He arrives at £100,000,000. But even in relation to this figure he says, “…I doubt if Germany could be made to pay this sum annually over a period of 30 years…”.

Taking this figure he then computes the current value of the thirty years of payments and arrives at a figure of c£2bn as a “safe” maximum figure. Again he qualifies this by saying that whilst it is a theoretically possible number it would actually be unlikely to be achieved. He then goes on to challenge how proposals for what would amount to £8bn or even £5bn could be sustained. He castigates the Treaty however not only for being economically impossible but also for being morally repugnant and dangerous. As he puts it:

“The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable, abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilised life of Europe.”

His words in 1919 were incredibly prophetic as is now well known. The Treaty and its impossible terms fed into a process which would once again unravel Europe in the most shocking way.

I appreciate that most of the above is well known but it is interesting to call it to mind in the current circumstances and the quote above is certainly worth reprising.

By 1921 the mood had changed and it was becoming clear that the Reparations Chapter in the Treaty of Versailles was beginning to crumble. In one of the essays of this period Keynes talks about the way “inside opinion” had accepted from the beginning the main conclusions he had set about the Treaty. In this context he challenges the lack of political leadership. He sets out what he takes to be the modus operandi of politicians in a democracy as follows:

“It is the method of modern statesmen to talk as much folly as the public demand and to practice no more of it than is compatible with what they have said, trusting that such folly in action … will soon disclose itself as such, and furnish an opportunity for slipping back into wisdom.”

There are many times one thinks this might be the explanation for an inexplicable political position. I can think of no other reason Harriet Harman would say the Labour Party should vote in favour of benefit cuts to working people and perhaps this is what Angela Merkel’s defence would be in relation to Greek debt forgiveness.

Back in 1921 Keynes distinguished the inside and outside opinion. The outside opinion is that of the public, voiced by politicians and the newspapers, whereas the inside opinion is that of politicians, journalists and civil servants expressed in limited circles. In other words the former was the folly the public demanded whilst the latter was what the politicians and others really thought. The belief being that such outside views would prove impossible to implement and therefore eventually the public would come to wisdom on the issue.

In Keynes view this was a dangerous mistake and meant that the outside view was simultaneously given too much attention and too little. Too much because it was regarded as unchangeable and impervious to rational argument. Too little because it assumed because its policy proposals were impossible they would ultimately create no harm. Failure to challenge the outside view when it is wrong is a mistake. It was in 1921 and it is now. In 1921 it sustained an iniquitous approach to reparations which were clearly impossible to maintain, now it is creating untold harm to a nation with an outside opinion that the Greeks will pay back the Debt.